Partnership GoodwillPartnership GoodwillChapter Chapter 1111Best viewed with Office 2010
GoodwillWhat is goodwill?the excess of the value of an entire business over the fair valueof its separable net assets.The exchange value in a fairtransaction (usually equivalent to the open market value)== the excess of assets over liabilities= capitalNote:Goodwill is not a separable asset as it cannot be sold separately.
GoodwillA business had the following separable net assets (at fair value) as at 1 January 2015:$$AssetsPremises, at net book value6,000,000Furniture and fixtures, at net book value2,400,000Inventory420,000Trade receivables280,000Bank160,0009,260,000LessLiabilities:Bank loans1,000,000Trade payables260,0001,260,0008,000,00Exhibit 11.1
GoodwillA business had the following separable net assets (at fair value) as at 1 January 2015:$$AssetsPremises, at net book value6,000,000Furniture and fixtures, at net book value2,400,000Inventory420,000Trade receivables280,000Bank160,0009,260,000LessLiabilities:Bank loans1,000,000Trade payables260,0001,260,0008,000,00Suppose the entire business was valued at $9,000,000 on the same date.The amount of goodwill = 9,000,000 – = 1,000,000Fair value of separable net assetsValue of the entire businessExhibit 11.1
GoodwillPurchased goodwillIt is the excess of the purchased price of the acquired business over the fair value of its separable net assets.
GoodwillInherent goodwillIt is the goodwill generated internally, which is not purchased upon the acquisition of another entity.It should not be shown in the accounting baaks of a business, unless it is a partnership.Whenever there is a change in the profit and loss sharing ratio or a change in the composition of a partnership, which affects the share of net assets of each partner, the goodwill of the partnership will have to be valued.
Factors affecting goodwill valuationWell-known brand namesSuperior locationsUnique production or operation methodsExperienced, efficient and reliable employeesGood relationships with suppliers and customersWhen a business has been established for a certain number of years, it may have many advantages such as:These advantages are intangible assets (non-current) of a business that may contribute to the earning capacity of the business and thus give rise to goodwill.
Factors affecting goodwill valuationExamples: Well-known brand names can help the business win customer loyalty and boost its revenues and profits.There is no uniform method of valuing goodwill. Goodwill is usually valued as a multiple of the average annual sales or net profit over a number of previous years.
The profit and loss sharing ratio is usually a basis on which profits and losses as well as the net assets of a partnership are to be shared among the partners.Whenever there is a change in the profit and loss sharing ratio, the share of goodwill by each partner will be affected. Thus, we need to value goodwill and make adjusting entries to partners’ capital balances accordingly.
- Spring '07
- Generally Accepted Accounting Principles, partner, Dr Goodwill